When uncertain financial times loom, questions about your retirement are sure to come up. Have I saved enough? Do I need to keep working? How can I safeguard my savings?
As people who lost significant savings in the economic recession of 2008 can attest, it’s possible to survive a recession. That year, an economic crash erased about $2.4 trillion from Americans’ 401(k) and IRAs. This was an especially hard hit for people approaching retirement, who didn’t have much time to rebuild their savings or wait for the stock market to rebound.
Here are some questions to consider when thinking through how your retirement will weather a recession.
Should I Begin Taking Social Security Payments?
While Americans are eligible to begin drawing Social Security benefits at age 62, often it can be beneficial to wait. The earlier you begin collecting Social Security, the smaller the payments will be—although one benefit is that you will receive more payments overall.
For every year that you wait to collect, your Social Security benefits typically will increase about 8 percent. You could claim the benefits early and invest them, but that option requires the discipline to invest the checks and a market that’s going to generate at least an 8 percent annual return (unlikely during a recession). Financial planners find that many people end up spending at least some of those early benefit checks. A better choice could be to hold off on withdrawing Social Security as long as possible.
When Should I Retire?
A recession may cause you to rethink your retirement plans. If you can no longer afford to stop working completely, you may find that a part-time job will generate enough income to match or exceed your portfolio’s annual distribution. For example, if your part-time job pays $13 an hour for a 20-hour workweek, you’ll earn $13,520 annually—the equivalent of a 13.5 percent annual return on a $100,000 portfolio value.
In today’s job market, you may find several types of part-time jobs that match your interests or skills. You could pet sit, plan weddings, repair cars, or turn almost anything you enjoy doing into a small business. You’ll also find plenty of work-from-home jobs that could draw on your professional skills or areas of interest. Working a part-time job would allow you to postpone withdrawing Social Security benefits and buy your portfolio some time to recover.
Should I Keep Contributing to My Retirement Account?
If you are still working full-time and have an IRA or 401(k) when a recession hits, you may have to consider whether you want to continue contributing. If you feel secure in your job, this can be a great time to buy into the market at low prices, and the market most likely will rally back.
However, recessions can be scary and emotional times for investors. Instead of getting caught up in the market, you may want to continue investing on your regular schedule. If you already have automatic paycheck deductions into your 401(k), this will be easy.
If a recession leaves you cash poor, however, and you haven’t been able to save up an emergency fund, you may need to temporarily stop contributions to free up cash for monthly expenses.
Should I Invest?
The days following a financial crash can be an excellent time to invest if you are willing to take the risk. For example, people who bought into the S&P 500 the day after Black Monday in 1987 saw 50 percent increase in only two years. If you have cash or savings on hand, consider investing through an index fund. You could recoup your losses from a recession quickly.
Which Accounts Should I Withdraw From?
Sometimes, people must draw on their investment portfolios during a recession to meet monthly expenses. While the best plan is to not touch your retirement accounts prematurely, if you’re in this situation, consider the tax implications of withdrawing from different types of accounts before you decide where to withdraw.
If you are already collecting Social Security and withdraw from a 401(k) or traditional IRA, the combined income could move some of your Social Security into a category where they are taxable. In this case, a better choice would be withdrawing from a Roth IRA, where withdrawals are not taxed and will not impact your Social Security payments.
If you do not collect Social Security, you won’t be affected by these rules. However, if you do prematurely withdraw money from your 401(k) and don’t pay it back, the withdrawal will set off a 10 percent penalty if you are younger than 59 1/2. However, the IRA does have 18 exceptions to this rule, so it may be worth reading the fine print if you need to make this kind of withdrawal.
Of paramount importance during a recession is staying calm and making good decisions about your retirement, even as the financial markets are in turmoil. If you are in doubt, a financial planner can help you navigate your finances during difficult times, as the decisions you make could significantly impact your retirement long after the recession ends.
The family office has served as an integral part of wealth management since ancient times, although the modern form of the family office was born in the late 19th century with the Rockefellers. In 1882, John D. Rockefeller created an office to organize his many lines of business and oversee his family’s investments; this office managed the Rockefeller wealth as an investment portfolio, rather than individual businesses. Though this setup was never described as a “family office,” it’s similar to the concept today. In essence, a family office is an organization, typically made up of financial professionals, who help wealthy clients and their families manage their money and make sound decisions about their investments and financial futures.
In 2020, according to a recent Forbes report, the idea of the family office will continue to evolve and grow in response to cultural, economic, and financial trends. This structure still will help individuals and families build and preserve legacies, amass inheritances, and protect family businesses. However, many family office providers will need to rethink think their structures and purposes in response to a changing world, according to Forbes.
Here are six trends that will affect the family office in 2020.
Family offices already are preparing for a recession, according to Forbes. A UBS Campden Wealth Family Office Report published this year notes that more than 50 percent of family offices are prioritizing increasing their cash reserves, mitigating risk, and taking advantage of opportunistic events. Almost half of the family offices surveyed are also increasing their contributions to direct private equity investments, while 42 percent are prioritizing private equity funds and 34 percent are investing more in real estate.
Transitioning family businesses
Many families now are selling their established businesses or buying other family businesses, while others are moving from managing companies to managing large wealth portfolios. This trend is increasing the need for family offices, as families seek to preserve their wealth and legacies for future generations, according to Forbes. Family offices are providing support and structure for wealthy families transitioning into new stages of wealth management.
Advances in technology and changes in global economic patterns have created a new phase in globalization that some experts are calling “Globalization 4.0.” Trade in the global south is growing quickly, and the developing world is playing a greater role in international trade flows. In addition, automation, artificial intelligence, Big Data, the Internet of Things, and other paradigm-shifting technologies are impacting markets and trade, giving rise to a trend that’s seeing more products made locally, close to their consumer markets. For family offices, this shift can force rethinking about where individuals and families want their holdings located and how they will structure their governance.
New family office structures
Wealth is shifting as the number of billionaires worldwide declined by around 5% amid market changes and slowing economies. However, more family offices are being created, according to Forbes, as businesspeople who started companies in the 1990s sell and tech entrepreneurs are preparing to put their companies on the market. Much of this influx of wealth will be invested, and for individuals and families, a family office can be an excellent structure to manage assets and chart a financial future.
How will this impact family offices? This influx of investors looks different from previous generations. Instead of a single or multi-family office, investors are looking for new structures, such as virtual and private multi-family offices or on-demand resources. The sharing economy has also made its way to the family office, as some investors now are interested in pooling their resources with other families to open more investment opportunities.
Prioritizing other risks
Family offices now are increasingly factoring in non-financial risks when making decisions about their investments. Climate risk, for example, is now part of the World Bank’s risk management strategy. Since the publication of the Panama Papers, which exposed the innerworkings of some family offices’ investments, the threats to an individual’s or family’s reputation is more frequently considered when assessing risk. Another important factor is the risk surrounding succession, which fails two-thirds of the time. According to Forbes, half of family offices do not have a succession plan. This is clearly a risk that more family offices will need to prioritize.
The role of banks and financial advisors has diminished as digitization has given family office holders more access to systems and information. Often, family office members can manage their own investments and transactions, which can give them complete control over how their portfolio grows.
Digitization also is affecting wealth management services that work with family offices. Families are demonstrating growing concerns about the security of their information and are asking for greater access to their transactions and portfolios. To meet these demands, wealth management services must increasingly utilize software and other digital tools to store data in a centralized, accessible location. They must also provide regular, open communication with clients, as well as more tailored, customized solutions.